ABSTRACT
The oil industry has been an internationally based industry that has been heavily dependent on outside financing sources. Historically, financing came from investment houses that, in most cases, participated in the projects as equity investors. However, investment companies can no longer satisfy the capital requirements of the current high level of exploration and development activities. The current trend is to involve commercial banks on a purely lending basis. Commercial banks, by their nature, are risk averse. In the case of oil and gas exploration and production they are asked to take not only technical risk and price risk but geopolitical risk as well. Methods have been developed by commercial banks to reduce technical and price risks to a point which enables them to be comfortable with a loan. However, geopolitical risks are more difficult to assess. The risks associated with many countries are the nationalization of the investment, new tax restricitions, restriction of currency movements, and/or revisions to the production sharing agreements.
Private and public services that rate country risks are available to the industry. The risk factor is used by the industry to determine whether or not to enter into activities in a certain country. Risk indices are based on political, economic and commercial factors, and are deterministic in nature. This paper shows that probability distribution analysis can better describe the risks and provide a more continuous rating system. The probablity approach can be incorporated into probablity reserve determination resulting in economic projections for specific countries or regions.
